Archive for the ‘Investment Management’ Category

People have been wondering what the stock market will do since they first began trading under the buttonwood tree in lower Manhattan.

I read an article – one of a zillion such articles that always get multiple opinions from people who invariably prove they never had a clue to begin with – yesterday by Gil Weinreich, writing for AdvisorOne, You can find a link to it on the IFG Facebook page; and this from the article caught my eye:

“The most recent Chicago Booth/Kellogg School Financial Trust Index indicates that 47% of the public expects the stock market to plunge in the next 12 weeks, according to Wharton professor Olivia Mitchell. Mitchell’s own portfolio has outperformed the stock market since 1999, when she put all her investments in Treasury inflation-protected securities. Her difficulty today, however, is figuring out what to do now that TIPS are paying negative returns.”

The professor put ALL her investments in TIPS. Translation: She was ‘timing the market’. Not the stock market, but the bond market. And, she’s got lucky. But, there was a price. Those who ride high on one side are often in danger of getting ‘whipsawed’ on the other.

The market giveth and the market taketh away.

The professor isn’t alone. Many intelligent people – the same people who would never build a home without a blueprint, or launch a business without a well thought-out business plan – often make investment decisions and asset allocations based on an outlook, which means it’s virtually always without a long-term written investment plan. It’s important to note there is NO professionally-written plan on earth, for a home, business, or investments, that would use only one material, or concentrate all risk into one sector.

Risk concentration isn’t a strategy. It’s a guess. It’s a hope. Yet, too many Americans do it all the time. It’s called ‘chasing returns’.

It doesn’t work.

It’s never worked.

Some point to past successes, similar to the example above; but, those always end-up being short-term. When you calculate the returns over time – and one might argue the professor’s track record since ’99 isn’t exactly short-term – it’s also true that returns are now negative and her investment life isn’t over yet – and won’t be for many years to come.

Anyone who’s attended a large gathering of financial types knows the room is always filled with better-than-average investors; yet, few – although the number may be closer to ‘none’ – can even beat the indexes consistently.

It’s not about being brilliant; it’s about being smart. Being smart really all about knowing what you don’t know… it’s about managing risk, not money… you just do it with money…. And market risk is only one of them.

Jim

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Jim Lorenzen is a Certified Financial Planner® and An Accredited Investment Fiduciary® in his 21st year of private practice as Founding Principal of The Independent Financial Group, a fee-only registered investment advisor with clients located in New York, Florida, and California.

IFG does not sell products, earn commissions, or accept any third-party compensation or incentives of any description. Opinions expressed are those of the author. IFG does not provide legal or tax advice and nothing contained herein should be construed as securities or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader. The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional. The Independent Financial Group does not sell financial products or securities and nothing contained herein is an offer or recommendation to purchase any security or the services of any person or organization.

When you sell an investment simply because it has declined in value, it becomes impossible to benefit when it rebounds. The same is true of the broad market in general. Many of these major upside moves can happen quickly, often in just a few days. To avoid missing these key days, you may want to consider staying invested and avoid panic selling. Consider this hypothetical example furnished to us by the folks at Principal Financial Group:

An individual who was invested in the S&P 500 from January 2, 1991, until December 31, 2010 would have turned a $10,000 investment into $58,137.02 for an average annual return of 9.20%, while an investor who panicked and sold their positions during this same period and missed the 10 best trading days in this period would have seen their return fall from 9.20% to 5.47%. [Source: Ned Davis Research]

The lesson is clear: No one can predict when the market will experience its best days.

2. Keep a Long-Term Focus

Studies show that time is your ally. Of the three types of investments studied (stock funds, bond funds, and asset allocation investment options), the average investors in asset allocation funds held their investment options the longest (an average of 4.30 years) over the five time periods studied (1-, 3-, 5-, 10-, and 20-years). It’s little surprise that these investors successfully weathered one of the most severe market declines in history (2000-2002). [Source: Dalbar 2010 QAIB study]

3. Have a Diversification Plan

According to the Dalbar study, investors guess incorrectly about the market’s direction 50% of the time. So, diversification helps guard against those errors; but, many people mistake duplication for diversification by buying multiple mutual funds not knowing many of the underlying holdings are identical.

Choosing different management styles and market capitalizations of equities and bonds isn’t as simple as you’re lead to believe on television. When was the last time you heard a financial entertainer the impact of highly correlated assets? It’s boring stuff and makes for poor television, which is why it isn’t discussed, but it’s what you need to know. Quality diversification enhances the benefits of asset allocation so investment balances are less affected by short-term market swings than they would be if you invested in a single asset class.

If you are an investor who is nearing retirement, consider consulting your advisor about this issue. Remember, asset allocation/diversification does not guarantee a profit or protect against a loss, but it will likely make your journey much smoother.

4. Utilize an Auto-Rebalance Strategy

Historically, business cycle contractions last about one-sixth as long as expansions. Now may be a good time to re-evaluate your risk tolerance. If you want a professionally managed investment option to handle this complicated task, you might want to consider a unified managed account (UMA). It’s an option that simplifies your paperwork, virtually automates the rebalancing process, gives you consolidated reporting while providing the diversification of management, styles, and investments needed to do the job right. UMAs can hold mutual funds, index funds, ETFs, institutional separately managed accounts, and more. A UMA is not an investment; it’s a type of account you use to execute your investment plan. Ask your advisor or – shameless plug – feel free to contact me for information about UMAs.

There are also target-date and target-risk asset allocation funds available on the market; but, tread carefully. Different funds with the same target date or target risk can still have very, very different holdings, styles, and risk profiles. Not everyone retiring in the same year has the same financial picture or ideas about how they want to make the financial journey. As you can tell, I’m not a big fan of ‘cookie-cutter’ solutions.

5. Keep Your Focus

Discipline is something everyone has until panic sets-in. Quite often, that’s when an advisor can show the most value. Successful investing is a marathon, not a sprint. The tortoise did win the race, you know.

6. Get Regular Checkups

Too many individual investors are still stuck in the old paradigm under which their advisor, actually a broker, would call them with investment ideas or changes they should make. Today, with the emergence of the fee-only – that’s different from fee-based – business model utilized by ‘pure’ Registered Investment Advisors (not dually registered to sell securities, too), the new paradigm operates more like other professional practices in law, medicine, or accounting. In short, you need to make an appointment for your checkup, at least annually. And, today, with online meeting technology, you can even do it without getting in your car… so there’s no excuse. Get your checkup! If you don’t, your financial health will likely suffer.

Jim Lorenzen is a Certified Financial Planner® and An Accredited Investment Fiduciary® in his 21st year of private practice as Founding Principal of The Independent Financial Group, a fee-only registered investment advisor with clients located in New York, Florida, and California. IFG provides investment and fiduciary consulting to retirement plan sponsors, and retirement and wealth management services for individual investors. IFG does not sell products, earn commissions, or accept any third-party compensation or incentives of any description. IFG also does not provide tax or legal advice. The reader should seek competent counsel to address those issues. Content contained herein represents the author’s opinion and should not be regarded as investment advice which is provided only to IFG clients upon completion of a written plan. The Independent Financial You can reach Jim at 805.265.5416 or through the IFG website, www.indfin.com, Keep up to date with IFG on Twitter: @JimLorenzen

Bob Clark, in a recent AdvisorOne article, says the answer is “fear.” Many people are afraid of:

• Being embarrassed by their current financial condition

• learning their financial situation is much worse than they realized

• of getting beat up for not saving more

• of being told to do things they don’t want to do, such as going on a budget, saving more, or buying more insurance.

He’s probably right. The old adage WIIFM (What’s in it for me) maybe best answers what people really want: How to get their financial house in order and keep it that way forever; how to achieve their goals with peace of mind; how to minimize risk; how to feel good about what their future!

Jim

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Jim Lorenzen is a Certified Financial Planner® and An Accredited Investment Fiduciary® in his 21st year of private practice as Founding Principal of The Independent Financial Group, a fee-only registered investment advisor with clients located in New York, Florida, and California. IFG provides investment and fiduciary consulting to retirement plan sponsors, and retirement and wealth management services for individual investors. IFG does not sell products, earn commissions, or accept any third-party compensation or incentives of any description. IFG also does not provide tax or legal advice. The reader should seek competent counsel to address those issues. Content contained herein represents the author’s opinion and should not be regarded as investment advice which is provided only to IFG clients upon completion of a written plan. The Independent Financial You can reach Jim at 805.265.5416 or through the IFG website, www.indfin.com, the IFG Investment Blog and by subscribing to IFG Insights lettersfor individual investors. Keep up to date with IFG on Twitter: @JimLorenzen

What are scattered assets? Many people have multiple investment accounts, often with multiple brokerages and or mutual fund companies. There are even those who have multiple institutional managers in separately managed accounts.

And, all this is in the name of diversification. I just wrote about this in our ezine which you can find on the IFG Insights Archive. But, here’s an overview:

Problem is, most of these people aren’t diversified at all? In fact, rather than reducing risk, they may actually be increasing it!

There are three issues at play – issues many often ignore:

Duplication is not diversification. But, there’s more: Few people realize that you can’t really diversify-away market risk. Think about it: If you bought stocks in the ENTIRE stock market, you’d only be replicating market risk, not eliminating it.

Mutual funds contain hidden taxes. Sure, most people know that; but, what they may not know is this: They don’t own the underlying fund holdings; they are shareholders of the investment company and as such they share in the fund’s capital gains. If the fund sold a stock they bought ages ago at a low price and now has large unrealized gains; the shareholder will share in ALL of those gains, even if the stock is sold just after the investor bought-in!

Tax inefficiency. This happens when there are multiple managers, even if one of them is the client, in addition, buying securities in his own online account. The duplication mentioned above can result in some real costs that can far outweigh any perceived savings. Again, you’ll find a detailed example in this morning’s IFG Insights, which you can find in our archive.

Like Warren Buffet once said, if you think investing is fun, the odds are great you’re doing something very wrong.

Enjoy!

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Jim Lorenzen is a Certified Financial Planner® and An Accredited Investment Fiduciary® in his 21st year of private practice as Founding Principal of The Independent Financial Group, a fee-only registered investment advisor with clients located in New York, Florida, and California. IFG provides investment and fiduciary consulting to retirement plan sponsors, and retirement and wealth management services for individual investors. IFG does not sell products, earn commissions, or accept any third-party compensation or incentives of any description. IFG also does not provide tax or legal advice. The reader should seek competent counsel to address those issues. Content contained herein represents the author’s opinion and should not be regarded as investment advice which is provided only to IFG clients upon completion of a written plan. The Independent Financial You can reach Jim at 805.265.5416 or through the IFG website, www.indfin.com, and by subscribing to IFG Insights letters for individual investors. Keep up to date with IFG on Twitter: @JimLorenzen

Getting ready to retire? Wondering whether you should sell or roll-over your company stock? That’s really a tax-treatment question, which means you should consult with your tax professional; but, here’s a little information you may want to review

What you should know: Shares of employer stock get special tax treatment, and in many cases, it may be fine to ignore this special status and roll the shares to an IRA. This would be true when the amount of employer stock is small, or the basis of the shares is high relative to the current market value.

However, if you have large amounts of shares or low basis, it might be a very costly mistake not to use the Net Unrealized Appreciation (NUA) Rules.[1]

If your company retirement account includes highly appreciated company stock, one option is to withdraw the stock, pay tax on it now, and roll the balance of the plan assets to an IRA. This way you will pay no current tax on the Net Unrealized Appreciation (NUA), or on the amount rolled over to the IRA. The only tax you pay now would be on the cost of the stock (the basis) when acquired by the plan.

By the way, if you withdraw the stock and are under 55 years old, you have to pay a 10% penalty (the penalty is applied only to the amount that is taxable).

So, you can then defer the tax on the NUA until you sell the stock. When you do sell, you will only pay tax at the current capital gains rate, whatever it is at that time. To qualify for the tax deferral on NUA, the distribution must be a lump-sum distribution, meaning that all of the employer’s stock in your plan account must be distributed.

Hypothetical Example:

Jackie just retired and has company stock in her profit sharing plan. The cost of the stock was $200,000 when acquired in her account, and is now worth $1 million.

The Rollover Option: If she were to rollover the $1 million to her IRA, the money would grow tax-deferred until she took distributions. At that time, the withdrawals would be taxed as ordinary income – for this hypothetical, let’s assume 35% federal. When Jackie dies, her beneficiaries would pay ordinary income tax on all of the money they receive.

Withdrawing the Stock: But if Jackie withdrew the stock from the plan rather than rolling it into her IRA, her tax situation would be different. She would have to pay ordinary income tax on the $200,000 basis. However, the $800,000 would not be currently taxable. And she would not have to worry about required minimum distributions on the shares. If she eventually sells the stock, she would pay the lower capital gains tax on the NUA and any additional appreciation.

Jackie’s beneficiaries would not receive a step-up-in-basis for the NUA. However, they would only pay at the capital gains rate. Appreciation between the distribution date and the date of death would receive a step-up-in-basis (we’ll assume a 15% capital gains rate); therefore would pass income tax-free.

With NUA

Without NUA

35% Tax on $200,000

$70,000

35% Tax on $1 million

$350,000

15% Tax on $800,000

$120,000

Total Tax

$190,000

$350,000

Let’s assume the stock value increases to $1.5 million in five years, and she decides to sell.

With NUA

Without NUA

Taxable Amount

$1.3 million

$1.5 million

Tax Rate

15%

35%

Potential Income Tax to Jackie

$195,000

Plus Amount Previously Paid

$70,000

Total Tax

$265,000

$525,000

Finally, assume that Jackie died in five years after the stock increased to $1.5 million. What would her beneficiaries have to pay?

With NUA

Without NUA

Taxable Amount

$800,000

$1.5 million

Tax Rate

15%

35%

Income Tax

$120,000

$525,000

Amount Receiving Step-Up in Basis

$500,000*

0

*Because 2010 is a transition year with estate taxes, there is a limit on the step up in basis of $1.3 million for capital gains.

Okay, now you know enough to be dangerous. Next step: Meet with your tax professional to (1) check for any possible tax law changes, and (2) plug-in your own numbers and tax rates, and (3) discuss any complicating issues this piece isn’t considering.

I have a report, entitled “Six Best and Worst Rollover Decisions” available and there’s a link to it in our ezine that covers this topic. You’ll find it in our Insights archive. You might want to subscribe.

Jim Lorenzen is a Certified Financial Planner® and An Accredited Investment Fiduciary® in his 21st year of private practice as Founding Principal of The Independent Financial Group, a fee-only registered investment advisor with clients located in New York, Florida, and California. IFG provides investment and fiduciary consulting to retirement plan sponsors, and retirement and wealth management services for individual investors. IFG does not sell products, earn commissions, or accept any third-party compensation or incentives of any description. IFG also does not provide tax or legal advice. The reader should seek competent counsel to address those issues. Content contained herein represents the author’s opinion and should not be regarded as investment advice which is provided only to IFG clients upon completion of a written plan. The Independent Financial You can reach Jim at 805.265.5416 or through the IFG website, www.indfin.com, the IFG Investment Blog and by subscribing to IFG Insights letters for corporate plan sponsors and individual investors. Keep up to date with IFG on Twitter: @JimLorenzen

When the Fed announced an open-ended QE3, the stock market rallied. In fact, the market’s been trending up since 2009 after the meltdown when all the government spending began. But, was that good? Have those stock gains been real?

Since the meltdown, people have been chasing returns whereever they could find them, whether it was with high dividend-paying stocks or buying gold – a demand largely fueled by all those tv commercials.

The financial industry, of course, has responded to both fear and greed by packaging yet another series of products, some of which come with either high or hidden costs… and sometimes both.

The question, of course, is whether all these “black box” solutions are really the answer… or whether the ‘basics’ are still relevant.

After all, companies that declare dividends are adjusting the price of the stock downward to compensate – you could arguably simply buy growth stocks that don’t pay dividends and simply sell what you need for income and still arrive at the same result!

And, while gold has increased in value – in terms of the numbers of pictures of presidents you receive for each ounce – have you really received more value when adjusted for inflation? Some say ‘yes’ but a J.P. Morgan study says something else.

We have more about this in our IFG Insights E-zine, which is appeared earlier this morning and is available in our archive.

It’s my guess much of the increase we’ve seen in virtually all equity categories, have been more nominal than real and are driven by the growth of debt.

We’ll see, won’t we?

Jim

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Jim Lorenzen is a Certified Financial Planner® and An Accredited Investment Fiduciary® in his 21st year of private practice as Founding Principal of The Independent Financial Group, a fee-only registered investment advisor with clients located in New York, Florida, and California.

IFG does not sell products, earn commissions, or accept any third-party compensation or incentives of any description. IFG does not provide legal or tax advice and nothing contained herein should be construed as securities or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader. The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional. The Independent Financial Group does not sell financial products or securities and nothing contained herein is an offer or recommendation to purchase any security or the services of any person or organization.

The average investor can often have a difficult time understanding just how different investment professionals operate and who they’re really dealing with.

There are three basic service model environments where investment professionals can be found; but, what can make these environments even more difficult to understand is that it’s possible for two to be combined… or one can be masqueraded to look like something else entirely! When you add to all that the alphabet soup of credentials and designations – some excellent and most meaningless – it’s no wonder the average investor has trouble figuring it all out.

While it would be impossible to address everything without writing a book, here’s an admittedly cursory overview of the three environments. All have their selling points and negatives – and none is intrinsically better than the other – but, since I’ve worked in all three, maybe I can help shed a little light on this and make them a little easier to understand.

1. The Captive Registered Representative

This is how many, including yours truly, began their careers; and, in fact, many never leave! The captive RR is someone you may know as a stockbroker, although the broker-dealer is actually the employer firm and the person you’re thinking of is a Registered Representative of the broker-dealer firm. These firms can be the well-known large ‘wire houses’ with widely-recognized names or they can be smaller regional or even local firms. In all captives, the RR is an employee of the firm and it is the firm that must sign ‘selling agreements’ with outside product providers if the RRs are going to offer anything other than in-house product.

I began my career in such a firm that provided all the services and infrastructure. The job of an RR was is to generate revenue for the firm. The hierarchy looked something like this:

What you may not know: In the old days, these large firms made most of their money from their own packaged in-house proprietary product, including mutual funds, unit investment trusts (UITs), and other offerings. I don’t know how true that is today – my guess is it’s probably much less so than in those days. The reason I think this is because the wirehouse industry’s margins have been declining steadily over the years, indicating fewer proprietary product sales and evidenced by (1) a greater number of mergers that never seem to end, and (2) the fact that broker payouts – the percentage they pay their RRs on generated revenues – have been declining. Brokers throughout the industry are having a tougher time ‘keeping their desks’ as margins have put pressure on RRs to increase revenue production. This may be a reason why some, if not all, within that community are resisting the adoption of a fiduciary standard.

As I said, some RRs never leave the large wirehouses, for a variety of reasons, including the large in-house back-office infrastructure support, etc. And, let’s face it, some may not be cut-out for self-employment. For those who are, they often take the next step.

2. The Independent Registered Representative

Some RRs who don’t want to remain ‘captive’ often want to set-out on their own and open up a private practice. When a RR makes the decision to ‘break free’, they have to pay their own bills. In my early days, that meant getting office space, phones connected, office furniture, supplies, and paying for my own insurance and a thousand and one other things; but, I could now select my own broker-dealer (BD) to function as my back-office and process all the paperwork through the various providers, etc.

There are hundreds of BDs available to the independent RRs and they come in all shapes and sizes with different attributes. Since my need was primarily for back-office processing, I wanted one that had (1) prompt and quality personal service, and (2) good relationships with quality custodians and other service providers. Today, almost all can probably fit that bill. While the RR is not an employee of the BD, the BD must still have Selling Agreements with product providers before the RR can access them for his/her clients.

One of the things about independence that independent RRs like is that the hierarchy can be flipped, which, to my mind, creates more of a ‘client first’ environment.

What you may not know: An independent RR may be operating out of a small office in your local community; but, don’t let that fool you. That independent likely has access to a huge array of institutional money managers and widely respected and recognized asset custodians and other service providers. In fact, it wouldn’t be at all surprising if your local RR office actually had a wider menu of availabilities than the major wirehouse down the street, since many BD operations have provided their RRs with greater access to the marketplace. An independent is far more likely able to provide you with a choice of custodians, etc., than a captive whose employer itself may want to be the custodian.

Something else you may not know: Ever walk into your local bank branch and see the investment desk sitting somewhere in the lobby or off to the side? When you sit down at that desk, you may think you’re still in the bank; but, guess again. There’s no FDIC insurance there! The likely scenario: Some BD has signed a deal with the bank to private-label a brokerage service. Not bad; you should simply be aware.

Some independent RRs finally decide to complete the process: They want to drop all sales and commissions and gain access to the entire world of products and service providers, including those who don’t work through sales channels. In my case, since I had already been in business in my own office for fifteen years, it was a simple process to register as an advisor and simply drop all the selling licenses. An RIA must avoid conflicts of interest and operate under a fiduciary standard: The clients’ interests must be paramount.

The model, however, looks much like the independent RR:

What you may not know: Captive RRs and independent RRs both very likely work for or with a BD that is dually-registered, making the RRs also RIA representatives. This allows them to work on a fee basis, as well as on commission. Some will tout their fiduciary status during the planning stage; but, you should ask if they will operate under that status during the investment implementation stage. It’s one thing to “adopt a fiduciary standard’ and quite enough to accept fiduciary status in writing. From what I’ve observed, few, if any, BDs will allow their RRs to accept this status, whether they’re captive or independent. That doesn’t mean they aren’t honest or that they don’t do good work; it’s just something you should be aware of.

Also be aware that some RIA firms provide investment management, asset custody, and portfolio reporting services all in-house while others prefer to work in a purely advisory capacity using third-party providers for the various services.

Example: In my own practice, most clients’ assets receive custody services from Pershing (owned by Bank of New York-Mellon). All institutional managers are independent of the custodian and all portfolio reporting is provided by third-party services independent of the managers. All parties are compensated by client fees only, as are my advisory services. While it may sound like more fees, it’s often actually less. All these services are usually ‘bundled’ by investment providers; I just unbundle them and ‘shop’ them individually, which can result in savings.

While this overview just scratches the service, it might give you some idea of the playing field. In the final analysis, choosing an advisor is a personal choice. You should find someone you’re comfortable with… and someone who will talk with you like an adult. Avoid the ‘glad handers’ who tell you what you want to hear; find one that will talk straight and tell you what you need to hear, even if you think you’re an investment genius.

Good luck!

Jim Lorenzen, CFP®, AIF®

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Jim Lorenzen is a Certified Financial Planner® and An Accredited Investment Fiduciary® in his 21st year of private practice as Founding Principal of The Independent Financial Group, a fee-only registered investment advisor with clients located in New York, Florida, and California. IFG provides investment and fiduciary consulting to retirement plan sponsors and selected individual investors. IFG does not sell products, earn commissions, or accept any third-party compensation or incentives of any description. Nothing contained in this material is intended to constitute legal, tax, securities, or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader. The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.

IFG does not sell products, earn commissions, or accept any third-party compensation or incentives of any description. IFG does not provide legal or tax advice and nothing contained herein should be construed as securities or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader. The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional. The Independent Financial Group does not sell financial products or securities and nothing contained herein is an offer or recommendation to purchase any security or the services of any person or organization.